JUDE WANNISKI'S RESPONSE TO PEDDLING KRUGMAN
SYNOPSIS: Scorns Krugman's emphasis on mathematical Economics
To the Editors:
In his essay, 'Peddling Krugman " Robert Kuttner has done your readers and the liberal community a great service by cataloguing the haplessness of MIT's enfant terrible, Paul Krugman. We might all suppose that Krugman's mathematical brilliance and prodigious output is evidence of genius of some sort, but it is not necessarily in economics, his chosen of field of endeavor. In recent years, we can hardly make a turn without finding Dr. Krugman pooh-poohing the works of everyone inside the academic establishment, and the efforts of those of us who are not blessed with the requisite credentials.
While it has been hard to escape Krugman, it has not been hard to observe that he has been trapped in a neo-Keynesian cul de sac. As Mr. Kuttner notes, it is one that forces him to conclude that there is no way out of the low-growth world in which we are all now trapped. We know there is somewhere a land of milk and honey, but we can't get there from here. In his fulminations, Krugman is absolutely correct in seeing that productivity is the key, but he throws in the towel far too easily when he says there is simply nothing we can do about it. Simply increasing the rewards to capital will bring it forth, increasing the productivity of labor.
The cul de sac results from a confusion in Krugman's mind in how change occurs. In his pooh-poohing the supposed menace of protectionism, he has written: "Even a severe trade conflict would have surprisingly modest effects. . . . A tariff war that cut world trade in half would do no more economic damage than a mild recession." Kuttner, who seems caught up in this confusion himself, tells us that "Krugman derives this conclusion, not implausibly, by taking the fraction of national income represented by trade, and then calculating how much trade really improves economic efficiency-not by much."
Change occurs at the margin, not at the median. External trade may account for only 5 percent of U.S. national income, which suggests the halving of world trade would cause only a contraction of 2.5 percent of GNP here. This elegant mathdividing 5 by 2assumes away the linkage between the present and the future, between income and wealth, between trade flows and financial flows.
Just imagine that the people of the United States have zero income from foreign trade, but hold half their financial assets in the shares of foreign companies, out of which they expect future income. By Krugman's math, there is zero effect on the U.S. economy because of the halving of world trade, because U.S. income can not be affected. What of the wealth of Americans, who see the value of their paper assets abroad crumbling in a huge market crash? What do their creditors think when they see their collateralized wealth disappear? Put yet another way, what would happen if only 2.5 percent of all the bricks on Manhattan Island were suddenly removed from the buildings?
Krugman's burden is his Ph.D. in economics, from which he can never escape. He has had drummed into him the central theorem that human beings, like hydrogen atoms, can all be smooshed into algebraic equations. Robert Kuttner, by contrast, remains blessed with simple journalistic skills, which have been leading him on a relentless search for the right answers. He can be saved as long as he continues asking questions until he runs out of people with answers. Paul Krugman has run out of both answers and questions.